Investing horizons and small cap stocks

Posted by: Aaron Pressman on March 03, 2006

Market guru Michael Panzner has a post up this week noting that we’ve just entered a six-week period of the year when small cap and technology stocks historically tend to lag the market. Bad news for me and my story(currently behind the subscription wall) in this week’s BW about why the small cap rally will continue for another year. On my one-year horizon, though, I’m confident.

Sure, small caps have outperformed in each of the past six years, which is longer than the average small cap rally. But small caps underperformed by historically large margins in the prior Internet bubble market. Valuations on small caps have risen but not to insane levels. In fact, small cap growth companies haven’t gotten too much pricier as the markets have favored value stocks for a while now. Plus, when almost every market strategist on Wall Street is saying this is the year for large caps (just like they did a year ago and the year before that), the contrarian in me is aroused.

What I’m really eagerly awaiting is whether any pundits decide that the mere fact that BW has opined in favor of small caps signals that the sector os poised to fall. We’ll have to wait and see.

(Updated March 6 to correct the spelling of Michael Panzner)

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Businessweek’s Emily Thornton, Amy Feldman, Ben Levisohn, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.